2008

Ford Motor Co. said July 24 its lost $8.7 billion in the second quarter, which was above expectations, and that it would hit the gas on its restructuring plan. The company wrote off more than $8 billion, based on the declining value of North American assets and Ford Motor Credit Co.'s lease portfolio, the Associated Press noted. The auto maker's amped up restructuring includes converting three large truck and SUV manufacturing plants to smaller, fuel-efficient vehicles and doubling its hybrid production and lineup in 2009.

Ford had publicly warned June 20 its financial picture would be bleak, as news came it could be headed for an S&P downgrade. The developments came a day after billionaire Kirk Kerkorian signaled he might be willing to put more capital, beyond a recent infusion, into the struggling Dearborn, Mich., automaker to help fuel its turnaround. But what does the auto industry activist have in mind?

As it continues to add more smaller cars and fuel-efficient vehicles, Ford said in a statement it would further cut large truck and SUV production and delay the release of its latest F-150 pickup truck due to market conditions affected by high gas prices and consumer worries over the economy. Ford said it will give details during its second-quarter report, which it did, but also offered a grim forecast in that June 20 statement: "2008 automotive results will be worse than 2007, cash outflows will be greater than previous guidance, and, unless the economy improves, it will be difficult for Ford to break even companywide on a pretax basis in 2009."

The broader, ongoing restructuring, which CEO Alan Mulally is steering, made some decent strides in 2007. But Ford on May 22 backed away from its goal of turning a profit in 2009, despite having reported April 24 an unexpected strong first quarter (which followed a fourth-quarter loss of $2.8 billion).

Meanwhile, Kerkorian unveiled June 19 a 6.49% stake in the company -- having purchased 20 million Ford shares through his Tracinda Corp., a tender offer that was massively oversubscribed, taking his stake to 140.8 million -- and signaled he may be willing to put up more capital to help fuel the carmaker's turnaround. But will he clash with Mulally? Probably not, or at least not soon, The Deal's Lou Whiteman explained:

Kerkorian has insisted that he has confidence in Ford and its CEO, Alan Mulally, however, many in the industry expect the investor to push for an acceleration of the company's turnaround and perhaps the divestiture of Ford's Mercury and Volvo brands. The investor has a long history of activism in the auto industry, having bought into Chrysler Corp. in the 1990s and more recently trying unsuccessfully to force change at General Motors Corp. ...

Still, few expect things to get ugly between Kerkorian and Ford in the near-term. The investor has publicly praised Mulally and his turnaround plan, and the two reportedly met earlier this week to discuss long-term plans.

Indeed, Kerkorian may push for divestitures, and the relationship could head south, but, a Volvo sale may not happen any time soon. Further, Ford is less vulnerable, Whiteman noted, as its founding family controls 40% of the company's voting rights, though Kerkorian now owns twice the number of actual shares.

Earlier in June, India's Tata Motors Ltd. closed on its $2.3 billion purchase of Ford's Jaguar and Land Rover brands, finally ending an auction that lasted nearly a year, and an important piece of the company's broader restructuring. (Ford bought Jaguar in 1989 for $2.5 billion and Land Rover for $2.7 billion in 2000.)

Under Mulally, Whiteman wrote in March, the "company has launched an extensive campaign to cut costs and trim its product portfolio after losing nearly $15 billion the last two years. Mulally is attempting to rebuild around the Ford nameplate that has sold strong globally but fallen out of favor in North America." Further: "Ford, recorded milestones in its restructuring in 2007, including a new concession deal with its powerful United Auto Workers union, said it intends to offer buyouts to all unionized workers in an effort to trim its ranks and adjust to declining domestic sales."

But a turnaround is a tall order, especially in a sour economy. How much more bleak can the outlook get for Ford? Whiteman examined the question in regard to Ford and its rival GM in April.

Though [staggering] losses have continued in recent years, GM's and Ford Motor Co.'s near-term bankruptcy risk has actually decreased, thanks to divestiture campaigns ... that have left both companies with billions in the bank. Additionally, a landmark concessionary deal reached with the powerful United Auto Workers union last Fall brought domestic automaker costs closer to foreign rivals.

Both GM and Ford continue to undergo extensive transformations aimed at restoring their North American operations to profitability. But such overhauls take time and are subject to changing car buyer tastes and design fads. While bankruptcy appears unlikely for the time being, the pain and suffering the automakers are causing for investors shows little sign of letting up.

CAR SHOPPING

Back in 2007, News of a deal for Ford's Jaguar and Land Rover brands looked like it was near and it was reportedly down to three.

• India's Mahindra & Mahindra Ltd. officially joined the fray Nov. 20, confirming it had linked up with Apollo Management LP on a bid, according to a Wall Street Journal report.
• One Equity Partners LLC was also believed to be a finalist, as was Tata, which got a boost from Ford's labor unions Nov. 21, saying that while they still opposed a buyout, Tata was the only would-be acquirer they supported.
• Ford named Tata its preferred bidder in early January and the deal was announced in late March.

Earlier in November, things were looking pretty good for Ford. The company said Nov. 8 its third-quarter loss was lower than expected and that it has made strides in its restructuring process. Ford claimed to have achieved $1.8 billion in annual cost savings in the first nine months of 2007. The news came days after Ford's deal with the United Auto Workers, which included the establishment of a union-run trust to fund future retiree healthcare costs and a two-tiered wage scale for new employees. The company said it expected the efforts would improve future results. Ford also noted progress in its efforts to sell off Jaguar and Land Rover.

Back in September, it looked like there were four left in the running for Jaguar and Land Rover. Mahindra (which later linked up with Apollo) and private equity firm Cerberus Capital Management LP -- which in May 2007 took control of Chrysler LLC from DaimlerChrysler AG through a $7.4 billion deal for 80.1% of the U.S. automaker -- were reported to have dropped out. Among those possibilities, sources told The Deal at the time, were buyout shops TPG Capital and Ripplewood Holdings LLC, in addition to One Equity Partners and Tata.

Looking to raise cash, the company confirmed the brands were on the block June 12 after accounts from U.K. media June 11 reported Ford had tapped bankers for help. While Ford had hoped to hang on to Volvo, the third of these premium brands, it said it was willing to hear offers given its cash constraints and interest in the other labels, a source told Whiteman, adding that the company, however, would have to be "overwhelmed" by an offer to pull the trigger. According to a New York Times report, opening bids for Jaguar and Land Rover came due July 19, and the brands drew strong interest.

On June 12, Alchemy Partners managing partner Jon Moulton confirmed his interest during a BBC radio interview. Seven years earlier, the firm made a play for MG Rover Group Ltd., then owned by BMW AG. BMW sold the Land Rover business to Ford. On June 13, The Independent said Apollo, Cerberus and Blackstone Group LP were interested. The buzz came two weeks after a Swedish media report indicated Ford was looking for a buyer for its Volvo division, citing German automaker BMW as a possible bidder, a rumor Ford officially denied.

In a similar move to shore up cash, the motor company agreed in March to sell its racing brand Aston Martin to a group that included David Richards, the chairman of Prodrive, which runs its racing team, and Kuwaiti investors Investment Dar and Adeem Investment Co., in a deal that valued the unit at $925 million. Ford said it planned to retain a $77 million stake. The four brands were part of Ford's money-losing Premier Automotive Group, a lot that some estimated could yield the automaker up to $10 billion in cash, Whiteman pointed out.

WIDE TURN

Ford's turnaround wouldn't come cheap. The company said Feb. 28, 2007 it would cost more than $11 billion, more than half of which would be set aside for benefits and pensions due laid-off workers. The first $10 billion was spent in 2006, and the remaining $1 billion came in the first quarter of 2007. The said it lost $12.7 billion in 2006.

As Whiteman noted, Ford's then-relatively new CEO Mulally said in a statement announcing the 2006 results:

We began aggressive actions in 2006 to restructure our automotive business so we can operate profitably at lower volumes and with a product mix that better reflects consumer demand for smaller, more fuel efficient vehicles. We fully recognize our business reality and are dealing with it. We have a plan, and we are on track to deliver.

In December 2006, the company announced a corporate realignment aimed at distancing itself from its image of old, featuring a strong focus on global markets, a new head of global product development and several managers reporting directly to chief executive Mulally, who, just three months after he replaced Bill Ford Jr., was clearly steering his own ship. Bloomberg reported:

"This is a first sign that this is Mulally's organization instead of Bill Ford's," said John Novak, an analyst in Chicago for Morningstar.

The news came two weeks after Ford unveiled plans to seek $18 billion in new loans and said that nearly half of its United Auto Workers-represented employees agreed to buyouts.

A month earlier, Ford reported $5.8 billion in losses for the third-quarter, signaling continued challenges ahead for the company. That news came just days after a report in the Financial Times Oct. 20 that LVMH Moët Hennessy Louis Vuitton SA's chairman and a Belgian financier were putting a bid together for Aston Martin (something Dealscape's Matthew Wurtzel had suggested back in early September).

The deals will help the company free up cash, but the question remains: What can save U.S. automakers?

Private equity, perhaps. On the same day DaimlerChrysler AG, the parent of Ford's domestic peer Chrysler, announced a $7.4 billion, 80.1% stake sale in the Michigan automaker to Cerberus Capital Management LP, Bloomberg reported May 14, 2007, that Ford's founding family may have been considering a stake sale. While Chrysler has its issues, like its fellow U.S. automakers, PE firms remain interested in the sector, as one recent Deal contributor noted.

GRINDING THE GEARS

In the fall of 2006, the company's executives were dropping like flies. Steve Hamp, chairman Bill Ford Jr.'s brother-in-law, said he would leave the company Oct. 31, when his role of chief of staff was eliminated. Just a month earlier, Ford was removed from his CEO role and replaced by Mulally.

The executive shift came on the heels of the company's then-latest move to fend off bankruptcy with a restructuring plan that would include cutting 10,000 white-collar jobs, shutting two facilities and offering buyouts to all of its hourly employees.

The latest round of cuts at Ford follow the trimming of 4,000 jobs and the shuttering of 14 plants earlier in the year, later deemed insufficient as the company posted $1.5 billion in losses for the first six months of 2006. Ahead of the company's announcement Sept. 15, Ford said in August that it intended to cut production in the fourth quarter by 21%, or 168,000 vehicles. For the full year, Ford said it planned to produce 3.048 million vehicles in North America, a 9% reduction from 2005.

The cost-cutting actions of Mulally, who has been credited with reviving Boeing Co.'s commercial airline division, marked his first steps in the new role.